Charity Reforms Don’t Go Far Enough

By

Gary Weiss

Oct. 7, 2016 2:25 p.m. ET

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By

Gary Weiss

Oct. 7, 2016 2:25 p.m. ET

Nonprofit accounting is hardly donor-friendly. Annual required disclosures on IRS Form 990 are murky and outdated, and nonprofits use all kinds of tricks to conceal how they’re spending contributions. So relief seemed at hand when the Financial Accounting Standards Board, or FASB, the rule-setting body for the accounting profession, recently announced the first major changes in nonprofit financial-reporting requirements since 1993.

City of Hope’s Spirit of Life gala, held in Santa Monica, Calif., last November.
Photo: Matt Sayles/Invision/AP

Don’t get too excited. With one exception, the FASB’s rule changes, which begin taking effect in December 2017, will not substantially improve nonprofit financial disclosure. (See “Spotting Nonprofit Accounting Tricks,”Penta, June 18.) Is this the best the FASB could accomplish after two decades? It’s anticlimactic after FASB Chairman Russell G. Golden announced that the rule changes addressed “concerns about the complexity, insufficient transparency, and limited usefulness of certain aspects of the [not-for-profit financial reporting] model.”

Probably the most consequential change resolves an anomaly in the way nonprofits disclose their disbursements. Now all nonprofits will be required to break out program expenses from routine overhead costs. The current rules required such disclosures only from groups that deal directly with the public—those classed as “voluntary health and welfare organizations,” or “what we used to call ‘United Way’ charities,” notes Hilda H. Polanco, chief executive of FMA, a management consulting firm for nonprofits. Other groups not in that category—arts organizations, museums, and even hospitals—are currently exempt.

Daniel Borochoff, president of Charity Watch, a nonprofit watchdog group, notes that the lack of this information means that some groups, such as the Dana Farber Cancer Institute and Veterans of Vietnam War and Veterans Coalition, can’t be rated by his organization. Dana Farber sent Charity Watch a letter pointing out that “accounting standards do not require the breakouts we request.” Beginning in 2018, charities won’t be able to hide behind that fig leaf.

But even this change may not be as consequential as it appears. Well-run nonprofits exempt from this disclosure often provide information voluntarily. Among them are City of Hope and Memorial Sloan Kettering Cancer Center, “because they realize they want to be on the accountability playing field,” Borochoff says.

The other changes being enacted by the FASB are even less earth-shattering. Nonprofits will now be required to provide more detailed information about cash on hand—their “available resources and liquidity,” as the new rules put it. Polanco notes that if a nonprofit has assets tied up—in, say, real estate, a security deposit, or some other illiquid asset—that will now be disclosed to donors. Liquidity tends to be an issue for only the most hard-up charities, and the usefulness of this information is questionable. Borochoff points out that 990s usually show how nonprofits are faring as of Dec. 31, when they tend to be flush due to year-end contributions, and even that information will be months old by the time it is made public.

The FASB is also simplifying how assets that have restrictions imposed on them by donors are presented. Currently, net assets are classified as unrestricted or either temporarily or permanently restricted. Unrestricted net assets will be called “without donor restrictions,” while temporarily and permanently restricted assets will be lumped together and rechristened “with donor restrictions.” The purpose is to “reduce complexity,” says the FASB, which has also tweaked presentation of cash flows and investment activities.

There’s little hope for more change. The latest FASB rules were the product of a five-year process that included three roundtables, 10 “workshops and fieldwork meetings,” and more than 60 meetings with various stakeholders, industry groups, and other interested parties. The result was an Exposure Draft that was issued in 2015 and received 260 comment letters.

But there’s still a lot the FASB could be doing, theoretically, to make life easier for donors—for example, better disclosure requirements for nonprofits disbursing large sums of money to overseas affiliates, which can conceal what is done with all that money. The Internal Revenue Service could also play its part by improving the timeliness of disclosures, says Borochoff. And publishing aggregate expenses incurred by nonprofits in addressing specific crises—such as natural disasters and wars—would make it much easier for donors to gauge where to deploy their contributions.

The upshot: Nonprofit accounting still has a lot of maturing to do before it can claim to be grown up.

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